Why Keep The Capital Gains Tax Break

Mitt Romney’s ultra-low tax rate on his ultra-high income is reviving questions about the breaks and perks that the wealthiest of the 1% receive from the rest of us. One of these is a special low tax rate for investments — as if anyone needed special tax incentives to induce them to make a bundle.

High Incomes At The Top

How much does Romney make? We won’t know until we get a chance to see his tax returns — if we do — but Romney described his $374,328 income from speaking fees last year as “not very much.” If $374K is “not very much” of his income … well … at least we can understand why he feels he can casually make $10,000 bets as if he was just pulling a dime from his pocket.

1,470 households made more than a million dollars and yet paid nothing — zero, zip, nada — in Federal income tax in 2009.

[. . .] The top 25 hedge fund managers in the US made $22 billion in 2010.

Low Taxes At The Top

Mitt Romney’s admission that he probably pays a 15% tax rate shows us what is going on. For you or me, when our taxable income passes about $35,000, we start paying a 25% rate, much higher than Mitt pays on his millions on income. (That doesn’t mean we pay 25% on money up to $35K, which is what most people think. It means any additional money we make after the $35K is taxed at that higher rate rate. If we make $35,001 we only pay an increase of ten cents. That’s how tax brackets work.)

Lots Of Money To Use To Attack The Deficits

This special low tax rate on capital gains is sucking a lot of money out of We, the People’s ability to pay for our schools, military, infrastructure, etc, which is part of why we are borrowing so much. How much? Continuing to steal from Richard Eskow’s post,

As we wrote earlier, eliminating these tax breaks would add as much as $44 billion to our bottom line in the next ten years. Or to put it another way:

Ending cushy breaks for these 25 billionaires could also reduce the deficit by as much as $44 billion. Paging all deficit hawks!

In 2008 the taxable income of everyone earning above $100,000 was $3.4 trillion. If we concentrate our tax reform on the upper end of that spectrum — the Romneys, not the folks in the $100-$400 thousand range — we know that every percentage point in increased collection comes out to another $34 billion per year. That ain’t chicken feed.

Why The Low Capital Gains Tax Rate?

The justification for a special tax rate for gains from investing capital is supposed to be to provide an incentive to invest. But there is already a really good incentive to invest: to make a bundle of cash. Piling a special “incentive” on top of making a bundle of cash creates market distortions – moving investors away from deciding where to put their money based on the value and merits of the investment and toward tax-reduction schemes.

The necessary precondition for investing capital is having capital. So a tax break on the return from investing capital is by definition a break for the well-off. Here is the reality: capital gains are taxed at a lower rate because most of the income of the 1% is from capital gains, and most of the income of the 1% is from capital gains because the tax rate is lower. The “incentive to invest” should be making a good investment, period.

I’ll bet you $10,000 that getting rid of this tax break helps fix the deficit, and leads to a saner investment climate. (Of course, I’m kidding, I think that is a lot of money.)

About Dave Johnson

Dave has more than 20 years of technology industry experience. His earlier career included technical positions, including video game design at Atari and Imagic. He was a pioneer in design and development of productivity and educational applications of personal computers. More recently he helped co-found a company developing desktop systems to validate carbon trading in the US.